Obama administration seeks to regulate large financial corporations

Obama administration seeks to regulate large financial corporations

Treasury Secretary Timothy F. Geithner calls for tighter regulation of large financial companies during a speech to the Council on Foreign Relations in New York.

The push to rein in insurance companies, hedge funds and private-equity firms that would wreak havoc on the nation's economy should they fail will be led by Treasury Secretary Timothy Geithner.

By Jim Puzzanghera March 26, 2009

Reporting from Washington -- The Obama administration is gearing up for an aggressive new push to regulate large financial corporations -- including insurance companies, hedge funds and private-equity firms -- that would wreak havoc on the nation's economy should they fail.

The move, led by Treasury Secretary Timothy F. Geithner, aims to reverse decades of deregulation that has allowed financial companies especially to operate without any significant federal oversight.

The effort was triggered mainly by increasing frustration over the government's inability to rein in firms such as bailed-out American International Group Inc., the giant insurer that has received federal commitments of as much as $182.5 billion because it was deemed too big to fail.

Under the proposal, the government for the first time broadly would regulate the market for complex financial instruments known as derivatives, the Washington Post reported late Wednesday. That market was the undoing of AIG, which lost tens of billions of dollars on contracts under which it agreed to insure investors against defaults on mortgage-backed bonds and other risky securities.

On Wednesday, Geithner disclosed general outlines of the initiative, the final piece of a multipronged attack to pull the country out of the deep recession and prevent a similar economic meltdown from happening again. He is expected to provide more information at a congressional hearing today.

The administration also wants to assure international allies that the U.S. is serious about calls for tighter rules and regulations over the financial system. Late next week, President Obama and leaders of the 20 largest economies will meet in London to work on a coordinated plan to deal with the global recession.

The goal of tighter regulation is "to help ensure that this country is never again confronted with the untenable choice between catastrophic financial risk and massive taxpayer bailouts," Geithner said in a speech Wednesday in New York.

"We came into this financial crisis as a country without the authority and without the tools we needed to contain the damage to the economy," Geithner told the Council on Foreign Relations. "We're moving now to ensure that we're equipped both in the future and as soon as possible with a more modern framework of regulation to . . . leave us less vulnerable to these kind of things in the future."

The Federal Reserve used extraordinary powers to lend $85 billion to AIG to keep it from failing in September, the first installment of what has become by far the largest government bailout of the financial crisis. Though Geithner's credibility has been damaged by the controversy over $165 million in retention bonuses given to AIG employees, he is trying to seize the initiative and use the problems of that bailout to highlight the need for regulatory changes and new government powers.

Geithner and others have noted that federal regulators have the power to seize failing banks and sell off their assets, but have no power to do so with non-banking financial companies such as AIG.

The attempt to tighten regulations and boost government power over the economy will touch off what could be months of high-stakes negotiations and lobbying. Geithner has said the regulatory overhaul would include attempts to address executive compensation, though he has not provided any details.

Key Democrats have signaled their support for granting the government power to seize and dismantle large financial institutions. That authority would be linked to new oversight of the economy for companies whose failure or activities pose so-called systemic risks.

"You need a systemic risk regulator," Sen. Charles E. Schumer (D-N.Y.) said. "And a systemic risk regulator doesn't just look. A systemic risk regulator, when there is systemic risk, has the power to intervene."

Sen. Bob Corker (R-Tenn.) agreed that the government needs the new power. But he expressed concerns about giving it to a political appointee, such as the Treasury secretary, instead of an independent government agency, such as the Federal Reserve or the Federal Deposit Insurance Corp.

Geithner's plan proposes that Treasury share the power with the two agencies. Corker and others want to give all the authority to the FDIC, which long has had authority to seize and unwind failed banks, as it did last year with IndyMac Bank in Pasadena.

"There's one thing we don't need to do is rush to judgment . . . and end up giving powers to people that could be used politically," Corker said. "I think to give an administration official, regardless of who the administration is, the ability to close down an entity, to me, raises some red flags."

When the FDIC seizes a failed bank, it makes the major decisions about how the bank is dismantled, including canceling employment contracts. Obama administration officials said they agreed to let AIG pay $165 million in retention bonuses this month because they feared employee lawsuits if the money were withheld.

The Treasury released three pages of details on legislation it will propose. New authority would cover financial institutions that have "the potential to pose systemic risks" to the economy but are not regulated by the FDIC. The Treasury said those would include insurance companies, bank and thrift holding companies, brokerage holding companies and futures commission merchants.

The first step would be for the Treasury and regulators to determine that a financial institution was in danger of failing, that a failure "would have serious adverse effects on U.S. economic conditions or financial stability" and that federal help would avoid or lessen those effects. The president would be consulted on the decision.

The government could make emergency loans, buy assets, guarantee debts or purchase equity in the institution to stabilize it. The institution then would be put in a government-run conservatorship to restore it to health or in a receivership to liquidate it.

The Financial Services Roundtable, which represents large financial institutions, endorsed the broad grant of government power to seize and dismantle companies whose failure would pose a major risk.

"The devil's in the details, but I think that's an appropriate response to the crisis," said Scott Talbott, the group's chief lobbyist.

Administration officials were eager to outline their proposals before Obama attends the Group of 20 summit in London. Many countries, particularly those in Europe, are expected to renew their push for global regulatory changes to prevent risky investments that helped push the world economy into deep recession.

At the meeting, Obama will try to "help build consensus on a broader framework, stronger framework of global standards over the financial system," Geithner said.

Geithner did not provide details on other parts of the administration's proposed regulatory overhaul, only sketching it broadly in his New York speech.

"We're going to lay out a range of measures to help produce a more stable financial system in the future," he said. Among the proposals would be "substantial changes" to requirements for the amount of money and other capital that financial institutions must have on hand so they can deal with dramatic shifts in the economy.

Those could apply to large hedge funds and private-equity firms that have adroitly avoided heavy regulation for years, especially when financial controversy arises as it did in the 2001 collapse of Enron Corp. with the discovery that the firm had vastly overstated income.

But opponents maintained that stricter regulation would discourage risk-taking by the firms, damp economic growth and threaten New York's status as a global financial center by pushing firms to relocate in Europe or Asia. Amid bulging profits and heavy lobbying by Wall Street, that argument held sway in the deregulatory climate that held sway during the Bush administration.